Last Updated on 28, October 2016
A client of mine has a daughter who suffers from Down syndrome. He wants to do some special needs planning for her but is not prepared to go through a thorough estate planning service because he has yet to decide on how to deal with many of his assets.
Hence, he and his wife do not wish to write their wills (yet).
They are also not prepared to go through a very detailed planning with me because they do not have time to fill up the long spreadsheet I gave them. However, they provided me with bulk park figures.
I suggested modular planning. This article is on how I do modular planning. All the figures and many of the facts were changed in this article but the main gist remains unchanged.
The following were partial fact finding (based on my written notes):
- Both client and his wife are turning 55 this year. Both of them are still working.
- CPF Life (combined): $2500 (estimated) at age 65. CPF-SA is expected to be zero out soon due to the transfer to CPF-RA.
- Properties: A few. I estimated they were worth about $4,000,000.
- Monthly rental income: $10,000.
- Cash in the bank: $1,700,000
- Mortgage loan: $500,000
- Children: 2 sons and 1 daughter who has special needs. His two sons are expected to graduate soon.
No detailed breakdown of the family expenses were provided to me (frankly speaking the client does not really know!) but I estimated it is about $15,000 a month.
They had bad experience with stocks, unit trusts and ILPs. Hence, their only investments are in properties.
They told me that they have attended various talks on estate planning for special needs children. They also attended my talk before on the same topic. What is stopping them was that they do not wish to set aside so much money when they are still alive because they need the money for their own retirement and they want to retain some flexibility on how to decide on what to do with their money in the future.
I advised them that they cannot have the cake and eat it all. Still, they can retain some flexibility if they set aside the money for their special needs child.
Later on I found that they already setup a trust with Special Needs Trust Company except that they only put in a few thousand dollars into the trust and there was no other funding mechanism. In other words, the trust is unfunded and will be unfunded if they don’t do something.
Looking at their situation, I suggest the two parents consider to purchase two single premium anticipated whole life policy insuring their own lives and making a nomination under the Insurance Act s49M to the trust which was already setup.
The following is what the whole life policy looks like:
- Single premium $500,000
- Death benefit is always 101% of the single premium plus a non-guaranteed amount.
- There is a monthly payout projected at 4.5%/12 of the single premium starting after 5 years. The monthly payout is for life. This is equivalent to receiving $1875 a month.
- The cash value is 80% of the single premium plus non-guaranteed value. As the cash value is guaranteed at 80% throughout the life of the policy, they can surrender it if they really need the money. Of course, they would have made 20% lost. That is why they cannot have the entire cake of flexibility and eat it all. That being said, they would not make any losses in surrendering the policy after 5 years of receiving the monthly payout because the payout received would have been projected to be 4.5% x 5 = 22.5% of the single premium.
Better than rental income
By purchasing two of the same policy, their combine monthly payout would be $3750. Actually this is better than renting out a $1,000,000 condominium because:
- Rental income is subject to income tax. Hence, the after-tax rental yield is below 4.5%.
- The need to manage tenants. If you get a bad tenant, you get nightmare. (I have another client who sold away their investment property after getting into legal lawsuits with the tenant!)
- The need to upkeep the properties. The after-cost rental yield is further lowered.
- There is no income tax to pay for the passive income receive from the anticipated whole life.
Other reasons why I recommended two of such policies are because:
- They still retain ownership over their assets.
- They can enjoy the passive income to fund their retirement.
- They already own a few properties. Since they do not like stocks, unit trusts and ILPs, they can use such anticipated whole life policy as a means to diversify their risks.
- Their entire principal is always refunded upon their death. Hence, there is no need to worry that the assets will be depleted.
- The total income of $3750 from the anticipated whole life policy plus the current rental income of $10,000 and the projected CPF Life income of $2500 means that the total monthly passive income is $16,250 which is above the current family expenses.
- By making an insurance nomination under s49M to the trust, these two policies are not subject to Letter of Administration (if without a will) and Probate (if there is a will). Hence, the trust will receive the death benefit faster. Since the payout to the trust is faster, it means the trust can start to function and disburse living expenses to the special needs daughter’s guardian or deputy earlier.
- The s49M is a revocable nomination. Thus, they retain the rights to change their nomination decisions.
- If the $1,000,000 remains as cash or is used to purchase another properties, it will be subject to Letter of Administration and Probate.
- Because these two policies are not subject to Probate, they can write their wills in the future without affecting these nomination decisions unless they deliberately revoke these nominations which require a special form to fill up. In other words, it is not possible for them to “accidentally” reverse their earlier decision. Hence, they can be assured that money earmarked for their special needs daughter is safe.
- Special Needs Trust Company’s trust is an irrevocable trust. Putting cash into the trust is irreversible. No parents would put $1,000,000 cash into it while still alive. That is why I recommended revocable nomination which will fund the trust only upon the death of the parent (and they still can change their mind on the nomination in the future).
Simple paper work
The most important part of the recommendation is that the transaction is very simple. The purchase of the anticipated whole life policy does not require medical underwriting. It’s just paper work. Special Needs Trust Company’s trust deed is a fixed template which nothing can be change (other than personal particulars and substitute beneficiaries).
Why $1m? Why two policies and not one?
I estimated that his daughter requires at least $1,000,000 in the trust. Assuming the interest and inflation to be equal and for 50 years time horizon, this money will fund a monthly expense of the special needs daughter equivalent to $1000000/(50*12) = $1,667.
As to why two policies: In Singapore, life insurance policies are insured under the Policy Owners' Protection Scheme of which the Singapore Deposit Insurance Corporation (SDIC) Limited administers the scheme. If the insurer goes bankrupt, the SDIC guarantees the death benefit of up to $500,000 per life assured. That is why I suggest breaking up the policies to park under two different parents.
I am a financial planner, so I need to think of the worst case scenario!
Is this the only way to setup a trust for Special Needs?
No, there are many ways to plan for special needs. This article highlights one of the many ways to do it and the most appropriate manner to plan for special needs depends on the circumstances of each case.
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hi Wilfred great example there. is such a single premium whole life policy available to all or there is a minimum entry premium?
Wilfred Ling says
The product is real and normally marketed to ultra high networth individuals.
However, there is no reason why a normal retail individual cannot buy. Entry premium is $133,350. Its also featured as “Product C” in another case study here: http://www.ifa.sg/case-study-generate-passive-income-retirement-planning/
hi Wilfred thanks for clarifying. i suppose that not the full 4.5% is guaranteed and perhaps the payout may not keep up with inflation for purchasing power.
Wilfred Ling says
The purpose of the article is to show case how estate planning can be done and not to demonstrate how good the returns of the whole life product is.
Taken into the context of the problem that the trust & whole life can solve coupled with knowledge about using the right nomination, the entire estate plan is something which no ordinary person can think of and execute.
Most people just look at the individual products without looking at their needs. In this example, the needs were established and thus the products are suitable despite it not be the best investment in the world.
A financial planner looks at the entire situation and construct a holistic plan. A product seller and a product buyer just look at the product in isolation.
ah i see. thanks for the education wilfred.
The single-premium wholelife policy looks like an annuity. Is there a difference? And why not an annuity?
Wilfred Ling says
The death benefit of an annuity usually decrease over the years.